Posted Dec. 9/08
These days we are on a financial market rollercoaster with dizzying daily plunges and stomach-wrenching twists and turns.
In 2008 the Toronto Stock Exchange (TSX) lost roughly half of its value from a high of 15,000 to just over 7,500.
This news would be bad enough if it was someone else’s money, but it’s not. It’s our retirement savings on this wild ride and, for many, that elusive retirement date is slipping slowly out of sight. We used to think that financial markets were the playground of the rich, but increasingly we have come to realize that ordinary citizens’ savings underpin these markets.
Retirement savings in Canada are valued at approximately $1.5 trillion. These savings, whether in pension plans or RRSPs, fuel our financial markets and need to be invested with a long-term view of value.
An employee who begins to contribute to his or her pension plan at 30, retires at 65 and lives to 90, requires the employer to have a 60-year commitment to that individual. Investing for the long-term means you care about the underlying sustainability of your investments. Unlike the day trader who sells stock on fractional price movements, the long-term investor is prone to risks that may only show up over time. Subprime mortgages are a case in point.
In the 1980s and 1990s, despite their growing size and influence within financial markets, few pension funds behaved any differently from mainstream money managers. Their investment strategies were short-term and myopic, often pushing firms for quarterly profits and frequently churning stock in their portfolios. But by the early 2000s, the collapse of Enron and other corporate scandals reinforced the idea that good corporate governance and long-term share value are linked.
Corporate governance concerns are not the only aspect of a long-term view of value. This long-term perspective recognizes that environmental, social and governance (ESG) factors play a vital role in how a company will perform over time. It seeks added information on these corporate standards. Valuing extra financial information separates those who seek proactive, long-term investment strategies from those who believe in the efficient market hypothesis and the short-term investment strategies that theory has spawned.
The shift toward long-term value as a core investment management belief attracts a significant number of pension funds and other institutional investors. It has been termed responsible investing, socially responsible investing, activist investing, relational investing, targeted investing, proactive investing, double and even triple bottom-line investing.
Responsible investors are using their market influence to form broad coalitions that seek to raise the environmental, social and governance aspects of the firms they invest in.
The Canadian Coalition for Good Governance is one such coalition, as is the Carbon Disclosure Project (CDP). The CDP, representing institutional investors with over $57 trillion in assets under management, recognizes the long-term investment risks posed by climate change. It seeks information from the world’s largest companies on how they are managing the business risks and opportunities presented by greenhouse gas emissions.
Another initiative in which a long-term view of value plays a significant role is the United Nations Principles for Responsible Investment. Signatories to this body formally recognize the importance of ESG factors in investment decision making. The UN PRI members represent $15 trillion in assets and include the CPP Investment Board, the Caisse de Depot and the BC Investment Management Corporation.
It has taken the current financial crisis to understand that, over time, sustainable financial returns are inexorably linked to sustainable companies and communities. Understanding this link is critical. Our retirement security hangs in the balance.
Tessa Hebb is the Director of the Carleton Centre for Community Innovation. Her new book, No Small Change: Pension Funds and Corporate Engagement, has just been published by Cornell University Press and will be available in the Carleton University bookshop.
